Maintain REDUCE on L&T Technology Services - Status quo prevails - HDFC Securities

Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities and Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

We maintain REDUCE on L&T Technology Services (LTTS), despite a slightly better Q1 revenue performance. Revenue guidance has been increased to 15- 17% growth for FY22 (13-15% earlier), which implies a decelerated trajectory of 2-3% CQGR (as compared to 4.2% QoQ delivered in Q1FY22), despite a base benefit (FY21 at -6%). Two wins with TCV >USD 25mn (similar to Q4) will support growth in the transportation vertical. LTTS' historical volatility in the large accounts bucket (>USD 20mn accounts) and volatility due to variability in segmental operating profile are reflected in the growth guidance of ~800bps below its strongest year. This growth will trail competitors with niche capabilities. We acknowledge LTTS' prowess/diversity in digital ER&D and the overarching ER&D addressability by assigning a 1.3x premium to its historical multiple (1.5x for mid-tier IT) to factor in the recovery trajectory and the embedded volatility. LTTS' valuations are at 30x FY23E and the stock has underperformed peers (especially its ER&D peers). Our target price of INR 2,680 is based on 26x Jun-23E EPS.

1FY22 highlights: (1) LTTS' revenue stood at USD 206mn (USD 204mn est.), +4.2/+20.3% QoQ/YoY (+4.3/+18.6% QoQ/YoY CC). (2) Growth was largely led by industrial products (+7.5% QoQ), followed by transportation (+4.3% QoQ) and process industry (+4.2% QoQ). (3) 11 large deal wins took place in Q1, of which six deals were >USD 10mn TCV (four deals were in telecom and hi-tech vertical) and two wins of >USD 25mn TCV each were in the transportation vertical (vehicle design for new-age OEM and software assisted design for tier-1). (4) EBIT margin improved 68bps QoQ to 17.3% (higher than estimate 15.1%), supported by growth in digital engineering, FX, greater productivity, and cost optimisation (higher offshore, utilisation), even as attrition increased to 14.5%. (5) Q2 margin is expected to be impacted by wage revision for mid to senior employees and rising attrition.

Outlook: We have factored in USD revenue growth of +16.6/+14.9/+15.1% and EBIT margin at 16.6/16.9/16.9% for FY22/23/24E respectively. LTTS is currently trading at 30x FY23E with the FY21-24E EPS CAGR at 26%.

Shares of L&T Technology Services Ltd was last trading in BSE at Rs.3465.65 as compared to the previous close of Rs. 2910.25. The total number of shares traded during the day was 190157 in over 16610 trades.

The stock hit an intraday high of Rs. 3492.25 and intraday low of 3100.2. The net turnover during the day was Rs. 640710040.

Source : Equity Bulls

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